In the short run, the non tradable sector is, by definition, subject to domestic demand constraints. A shortfall in non tradable demand inevitably limits growth on that side of the economy.

In such economies, that pattern not only typically depended on leverage it also enlarged the non tradable side of the economy and shrank the tradable side. And yet, given that the non tradable sector is constrained by its reliance on domestic demand, recovery if it comes will depend on the tradable sector s growth potential.

To be effective and properly targeted, policies need to include an accurate diagnosis of growth potential and impediments in both the tradable and non tradable parts of the economy. Focusing on one (say, the competitiveness problem in the tradable sector) to the exclusion of the other (perhaps a serious non tradable demand shortfall or stagnant absolute productivity) will not be enough.

In fact, the employment generated by the tradable sector has been in services at the upper end of the distributions of value added per person, education, and income. As a result, growth and employment in the tradable sector have gone separate ways, with healthy growth and stagnant employment.

The main point is that restoring growth requires a careful analysis of structural balance, attention to demand constraints in the non tradable sector, and a focus on the impediments to expanding the tradable sector. Some of those impediments are supply side rigidities others have more to do with bloated domestic demand.

In the non tradable sector (60 70 of the economy in advanced countries), the main growth inhibitors are weak demand, as in the United States following the financial crisis, and structural and competitive impediments to productivity, as in Japan. In the tradable sector, growth depends on a country s productivity relative to incomes and competitiveness.

Tradable Prosperity

An undervalued currency also tends to produce an unbalanced growth model of the opposite kind an outsize tradable sector and insufficient domestic aggregate demand. Because the non tradable sector in advanced economies tends to create more jobs, this model can lead to an employment problem (even if it is partly masked by cutting hours rather than workers).

The challenge is to apply these insights in a world characterized by global economic interdependence, major imbalances, and a worsening growth and employment problem. It is a world in which economies are connected directly in the tradable sector of the global economy, and indirectly through the demand and employment linkages between the tradable and non tradable sectors of individual economies.

But there is more to the productivity conundrum than the 2008 crisis. In the two decades that preceded the crisis, the sector of the US economy that produces internationally tradable goods and services one third of overall output failed to generate any increase in jobs, even though it was growing faster than the non tradable sector in terms of value added.

Developing the service sector could also diversify the production base, thereby enhancing economic resilience and boosting growth momentum. Modern services are becoming increasingly tradable, providing new export opportunities.

Moreover, not only is the tradable sector of Japan s economy highly vulnerable to a slowdown in China, but the recent conflict over the Senkaku Diaoyu Islands raises the prospect of economic decoupling. Apart from that, Japanese economic performance is set to remain weak, because the non tradable side is not a strong growth engine.

Unfortunately for advanced economies, the gains in per capita value added in the tradable sector were not large enough to overcome the effect of moving labor from manufacturing jobs to non tradable service jobs (many of which existed only because of credit fueled domestic demand in the halcyon days before 2008). Hence the muted overall productivity gains.

Rising incomes require rising productivity. That means increasing capital and human capital intensity across both the tradable and non tradable sectors of the economy.

(4) As regards tradable financial assets, it is required to separately list the beginning of period and end of period fair value of tradable bond investment, tradable equity instrument investment, financial assets which are specified to be measured on fair value and whose fluctuations are included in the current profits and losses, derivative financial assets and other tradable financial assets.

But, for individual economies, relative productivity versus income levels determines the share of global tradable aggregate demand that is accessible. Unlike the non tradable side of the economy, the domestic component of global tradable demand is not an absolute constraint on growth nor is the rate of growth of global tradable demand an absolute constraint, given the possibility of increasing share.

This scheme implements tradable quotas among the EU States.

The alternative is muted wage and income growth shared across the income spectrum, combined with productivity enhancing measures. This was a component of Germany s successful reform program of a decade ago, which included labor market and social security reforms, the combined effect of which was to restore competitiveness and growth potential in the tradable sector, while improving productivity on the non tradable side.

A somewhat more sensible concern might be that the dollar s reserve currency status causes it to be over valued with respect to every currency, not just the renminbi. That could create additional pressure on the tradable part of the US economy, and thus might help to explain why the US tradable sector has not generated net employment for two decades.

The US is adjusting structurally and generating real (inflation adjusted) GDP growth (though well below its potential annual rate of 3 3.5 ). The tradable sector is expanding and is not dependent on leverage to generate aggregate demand.

When the deleveraging cycle begins, the private sector starts to adjust structurally a pattern clearly seen in the data on growth in the tradable side of the US economy. Muted wage growth increases competitiveness, and underutilized labor and capital are redeployed.

Over the next decade, for example, China will replace much of its labor intensive assembly employment with higher value added employment in manufacturing and services, not only in the tradable sector, but also even more noticeably in the rapidly growing non tradable part of its economy. The expanding scope and diminishing costs of automation and additive manufacturing may affect labor intensive functions globally, including in earlier stage developing countries.

(13) As regards tradable financial liabilities, it is required to separately list the beginning of period and end of period fair value of offered tradable bonds, financial liabilities which are specified to be measured on fair value and whose fluctuations are included in the current profits and losses, derivative financial liabilities and other tradable financial liabilities.

The report also sheds light on another important question in the climate debate Is global cooperation critical to mitigate climate change? For a given economy, does acting alone yield distinctly inferior growth paths say, by damaging the competitiveness of its tradable sector?

Until the crisis of 2008, middle and lower income job growth occurred entirely in the non tradable sector of the economy, which accounts for roughly two thirds of advanced countries output and employment. Here, incomes and value added per employee remained largely flat.

In some European countries, where income inequality has remained in check, this has been a component of a deliberate strategy to maintain employment growth and competitiveness in the tradable part of the economy, with wage restraint partly shared across the income distribution. In the United States, income inequality has risen as the upper end of the income and education spectrum benefits from globalization, while the rest experience declining employment opportunities in the tradable sector.

For several decades, that tendency has been offset by ever more intensive trading of tradable goods, often passing through many countries in complex supply chains. In the future, however, the shift to non tradable consumption may dominate.

Non tradable activities are akin to a country s sports leagues different people like different teams.

To realize that potential, the tradable sector has to re expand at the margin as a weakening currency causes imports to fall and real unit labor costs decline as nominal wages flatten out, unemployed labor and capital flow toward external markets for goods, services, and resources.

Although the service sector, which accounts for the majority of employment, is holding up relatively well, the country s output of tradable goods, many of which are produced for export, is weakening sharply. Chinese exporters are caught between the pincers of weak foreign demand and rapidly rising domestic wages.

What they do not require is geographical nearness or the physical movement of goods. They represent a large share of the global economy, and they are gravitating rapidly toward the tradable sector, with increasingly powerful digital and information technology chasing imperfectly mobile human resources and new rapidly growing markets.

Though the US is finally emerging from an extended period in which potential output exceeded demand, high unemployment continues to suppress demand in Europe. One of the main casualties is the tradable sector in China, where domestic demand remains inadequate to cover the shortfall and prevent a slowdown in GDP growth.

The speed of structural adjustment is also strongly influenced by how easily employment can shift from an economy s non tradable to its tradable side and across segments of global supply chains. Countries degree of labor market flexibility varies considerably, and the reforms that increase it are critically important.

Most of the job losses in the tradable sector were in manufacturing industries, especially after the year 2000. Although some of the losses may have resulted from productivity gains from information technology and digitization, many occurred when companies shifted segments of their supply chains to other parts of the global economy, particularly China.

Look more closely, however, and you will discover that these countries vaunted growth models cannot possibly be replicated everywhere, because they rely on large external surpluses to stimulate the tradable sector and the rest of the economy. Sweden s current account surplus has averaged above a whopping 7 of GDP over the last decade

It is easy to get lost in the details of recovery patterns, so a sound framework for assessing potential growth helps. In fact, the Spanish economy is a classic case of a defective growth pattern followed by a predictable, policy assisted recovery that is driven (with a delay) mostly by the tradable sector.

The crisis struck domestic demand, and the tradable sector was incapacitated, because the rapid rise in relative unit labor costs, combined with an over valued euro, had undermined competitiveness. Moreover, the crisis related damage to banks balance sheets constrained demand by severely limiting household credit and lending to small and medium size businesses.

But, despite some transitional market turbulence, the overall effect will likely be positive. The beneficial effect on the risk return options available to investors savers (including pension funds) will outweigh the higher cost of debt indeed, an important subset of growth engines in the tradable sector is not dependent on low cost debt.

Accumulating excessive debt usually entails moving some part of domestic aggregate demand forward in time, so the exit from that debt must include more savings and diminished demand. The negative shock adversely impacts the non tradable sector, which is large (roughly two thirds of an advanced economy) and wholly dependent on domestic demand.

Market fragmentation in the more diversified economies is often due to intraregional investment priorities in non tradable sectors, particularly real estate.

In particular, although China s tradable sector is highly exposed to developed economies, the government is likely to accept some short run slowdown, rather than adopting potentially distorting stimulus measures. Given the risk of re inflating asset bubbles, no one should expect a dramatic easing of credit of the type that followed the 2008 meltdown.

This is because most services are not tradable and they need to be produced when and where they are consumed (UNCTAD 2004b).

In principle, Germany could try to boost domestic demand by leveraging up but, unless the exchange rate adjusts upward to shrink the tradable sector at the margin, doing so would be inflationary. The European Central Bank would then have to intervene to maintain the credibility of its commitment to price stability, which is its primary mandate.

From the standpoint of growth and employment, public and private debt masked an absence of productivity growth, declining competitiveness in the tradable sector, and a range of underlying structural shortcomings including labor market rigidities, deficiencies in education and skills training, and underinvestment in infrastructure. Debt drove growth, creating aggregate demand that would not have existed otherwise.

These trends reflect a combination of technological and global market forces that have been operating over the last two decades. On the technology side, labor saving innovations in network based information processing and transactions automation have helped to drive a wedge between growth and employment generation in both the tradable and non tradable sectors.